LOS ANGELES — Sending the message that MetLife should have stopped agents who referred clients to an unauthorized investment scheme that could help them buy insurance, a jury awarded approximately $15.6 million to the first of many individuals’ claims earlier this fall.

The case raised the issue of how well a large corporation supervises its insurance agents. Attorneys for MetLife focused on convincing the jury that the actions that led many people, including the plaintiff, Christine Ramirez, to invest in Diversified Lending Group, were completely outside the scope of its responsibility. Primarily, MetLife’s attorneys argued that agents either violated known policies without corporate knowledge or conducted outside business that propped up a $216 million Ponzi scheme.

“(Supervision) had nothing to do with outside business activities engaged by outside companies selling to outside customers a product that is an outside product,” Sidney Kanazawa, an attorney representing MetLife, told the jury in his closing arguments.

In the end, the jury didn’t agree. It unanimously determined MetLife, its subsidiaries, New England Life Insurance Co. and New England Securities, and Tony Russon, who oversaw both companies, were liable on four civil counts including aiding and abetting a violation of California securities laws, negligence, and aiding and abetting deceit and financial elder abuse.

The outcome follows a general trend observed by others in the insurance industry. Whether through state legislation or courtroom outcomes, companies are being held more responsible for agents’ actions, Neil Granger, a 30-year veteran in the life and disability insurance industry who consults on cases of fraud and focuses on abusive practices against seniors, told the Northern California Record. He wasn't involved in the MetLife case.

“I think the outcome showed the plaintiff's attorneys were able to convince the jury that Metlife had responsibility for the actions of their agents, and that’s kind of a big deal,” Granger said. “That’s always the challenge in these cases. The insurance company says, ‘We don’t control our agents because they’re not our employees; they’re independent contractors.’” 

He said it appears Ramirez’s attorneys successfully convinced the jury that MetLife should have known about a problem that was allowing people to be “financially targeted and abused.”

The jury awarded Ramirez, who is 75 years old, approximately $15.3 million in punitive damages, including $10 million from MetLife Inc., $2.5 in punitive damages from New England Securities, $2.5 in punitive damages from New England Life Insurance Co., and $330,000 in punitive damages from Russon. The jury also awarded Ramirez $239,890 in compensatory damages.

“I’m very, very grateful and elated,” Ramirez told the Northern California Record after punitive damages were announced. “It turned out better than I could have imagined. I think I'm still in shock.”

She is one of 99 individuals represented by Thomas Foley, a founding partner in Foley Bezek Behle & Curtis LLP, and co-lead counsel Richard E. Donahoo of Donahoo & Associates. Their clients didn’t purchase MetLife insurance but did invest in DLG. Approximately 24 clients were solicited by the same agent who pitched MetLife and DLG to Ramirez. The rest were solicited by other agents who recommended the program after Russon vouched for DLG’s owner, Bruce Friedman.

Russon had an existing business relationship with Friedman at the time he planned and hosted a meeting that introduced his insurance agents to DLG’s premium financing program. Friedman owed Russon $300,000 and bounced several checks between 1999 and 2004 in an attempt to pay it back. When Russon brought Friedman into his office to pitch DLG, he and Russon had a repayment agreement in the amount of $750,000 — the debt, plus interest. The agreement gave Russon the right to half of Friedman’s income until the debt was paid. He later accepted repayment in the form of DLG notes. He also received a commission when he helped Friedman purchase life insurance from MetLife.

In March 2008, Ramirez pooled money from her personal savings and retirement account, and borrowed money against her home to invest $279,769 in DLG, believing it was a better way to ensure she had enough to live on in her retirement. She was told as much after sitting through a life insurance pitch arranged by her boyfriend, Paul Walker. He testified that he was referred to Scott Brandt, an agent at the MetLife subsidiary, by a close friend to buy life insurance.

At the presentation, Walker and Ramirez learned they could invest in DLG, which guaranteed a high return, and use the return to pay for insurance. This was referred to as a “premium financing” plan. Donahoo said the goal was to offer a new option for potential customers to pay for various types of insurance, which also benefited Friedman, whose plan to attract investors “didn’t really fly” until Russon and MetLife got involved.

Ramirez said she believes she wouldn’t have invested in the fund if it hadn’t been introduced with what looked like MetLife’s stamp of approval. She sued MetLife, a major insurance corporation, and one of its California subsidiaries that, she claims, presented DLG as a “safe and secure” investment.

A year after she invested, the U.S. Securities and Exchange Commission sued Friedman and two of his companies, including DLG, unveiling the fund as a $216 million Ponzi scheme. Friedman fled when his criminal activities were uncovered and died in a French prison while the FBI worked to extradite him.

Over the course of the trial, Ramirez’s attorneys presented evidence supporting their argument that MetLife passed up opportunities to address the improper conduct in Russon’s office. It approved and took steps to enact a long-term care group insurance program with DLG’s affiliate, Applied Equities, Inc., but failed to thoroughly check Friedman’s background, which he later divulged to his investors. It included bankruptcy and a felony conviction. The first program never got off the ground, but within a year, Friedman presented a premium financing program to Russon’s insurance agents. With their referrals and, later, with Brandt’s direct sales of the DLG promissory notes, Friedman saw the number of investment accounts jump from fewer than 20 to approximately 800.

Then, in 2006, an insurance application that was flagged because of its unauthorized use of third-party financing led a senior fraud investigator to uncover information about Friedman that “raised serious red flags.” She sent it to her superiors; but because the application was never approved, the issue was dropped.

After the SEC seized DLG in 2009, MetLife fired Russon, Brandt and other agents who had been involved with the scheme. Investors recovered part of their investments. Ramirez and others turned to MetLife to recover lost investments, but were denied because they never purchased life insurance.

A MetLife spokesman said the corporation is disappointed in the verdict and will likely appeal.

“We're pleased that the jury reaffirmed that a regular person can still prevail against a large corporate entity,” Donahoo told the Northern California Record after the jury award was announced. “We think the jury wants Wall Street to know that when they fall short, regular people get hurt and they have to do better.

As to how this could impact the other pending cases, Donahoo said, ‘We've always hoped that MetLife would do the right thing. We hope this jury's message will be heard.”

To Richard Doss, a securities lawyer in Atlanta, it makes sense to hold MetLife liable for failing to supervise its agents. After all, that’s the law. Insurance companies set supervisory procedures to make sure their business is in line with state law.

But in his experience, many companies don’t have adequate processes for supervision.

“There needs to be better regulation,” he told the Northern California Record, adding that the life insurance and brokerage industries are competing more and more for retirees’ money, leading to behavior that requires closer scrutiny. He said a jury award of the size levied against MetLife and its subsidiaries should catch people’s attention.

“I think raising public awareness on this will put pressure on the regulators in the system,” he said.

In California, fraud committed against people over age 65 is taken very seriously, Granger said, citing beefed up laws that hold insurance companies to a higher standard of oversight when selling financial products to senior citizens. The law makes them a protected class.

Based on conversations with attorneys, Granger estimates that a quarter of elder abuse is financial. People most often talk about the kind perpetrated by someone the person knows — a family member, for example.

Even an oft-cited MetLife survey of news articles on financial elder abuse makes little mention of the kind that involves the sale of financial products. But after seeing many questionable and abusive transactions, Granger said the danger is that taking advantage of seniors with money is often a business model. He said the scenario in the MetLife case is very believable because insurance agents are always looking for ways to make new sales, including introducing someone to a product like the one offered by DLG.

“It would be attractive to agents,”  he said, adding that many agents are ignorant participants.

Elderly people are targeted by financial scammers because they have the money, Shawna Reeves, director of Elder Abuse Prevention at the Institute on Aging, told the Northern California Record. She said arguments that elders are gullible, too trusting, or not financially savvy don’t ring true for her. Rather, scammers are experts at finding a way to “separate elders from their money.”

“Elders are targets of investment fraud primarily because they have built up more wealth than younger people," Reeves said. "The scammers know this, so they make a bee-line for elders' bank accounts, home equity, pensions and other assets. I don't think we've gotten much better at preventing investment fraud from happening. And it becomes a David versus Goliath type of situation when it's grandma versus a multimillion dollar corporation. How does grandma protect herself? A better question is, how do we protect grandma from getting targeted by investment fraud schemes in the first place?”

She agreed that the message to MetLife was clear — and she hopes it’s effective.

“MetLife must train and supervise its agents so that elders are not harmed in the future by its sales practices or by predatory products that appear to be endorsed by MetLife,” she said. “I think this case demonstrates a clear extension of corporate liability, and I hope that it leads to better practices at MetLife.”

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